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The Nuclear Deal's Decertification: An Incalculable Risk

Client Advisory

On January 16, 2016, after years of intense negotiations and numerous interim agreements, the United States, the United Kingdom, Germany, France, Russia and China (the five permanent members of the United Nations Security Council and Germany, otherwise known as the “P5+1”) implemented an agreement with Iran and the European Union concerning Iran’s nuclear program. Under this Joint Comprehensive Plan of Action (the “ Nuclear Deal”), Iran officially renounced the development or acquisition of nuclear weapons. [i] In return, the P5+1, the European Union, and by extension the United Nations, agreed to lift all U.N., multilateral and national sanctions related to Iran’s nuclear program, including in the areas of trade, technology, finance and energy. [ii]

The Nuclear Deal represented a drastic change in policy, particularly for the United States. Before to the Nuclear Deal, the U.S. and its allies sought to deter Iran’s nuclear program, which they generally suspected was an effort to develop nuclear weapons, by engaging in broad multilateral sanctions against the Iranian government. Notably, the U.S. imposed not just primary sanctions prohibiting U.S. persons from transacting with Iran, but also secondary sanctions that would punish anyone (regardless of citizenship or location) who conducted business with Iran by preventing such a person from having access to the U.S. markets, including its financial system. [iii] While these sanctions were largely effective in causing severe economic hardship to Iran, it continued its nuclear program. [iv]

Current Controversy

The current U.S. posture towards the Nuclear Deal reflects the significant controversy surrounding its adoption. Former President Obama and his administration negotiated the Nuclear Deal on behalf of the U.S., but it was never ratified by the U.S. Senate, meaning it does not have the status of a treaty under U.S. law. [v] In fact, the mere prospect of the Nuclear Deal generated so much political controversy within Congress that it led to the passage of the “Iran Nuclear Agreement Review Act of 2015” (the “Nuclear Review Act”) before the Nuclear Deal was actually implemented. [vi] Under the Nuclear Review Act, the president must certify to Congress every 90 days as to Iran’s compliance with the Nuclear Deal and that, among other things, the sanctions relief provided under the Nuclear Deal is “vital to the national security interests of the United States.” [vii] Note that the Nuclear Review Act’s certification requirements are a creature of U.S. law and are thus distinct from the Nuclear Deal’s certification requirements, which are delegated to the International Atomic Energy Agency (the “IAEA”).

At this time the IAEA, U.S. allies and the U.S. itself agree that Iran is in at least technical compliance with its obligations under the Nuclear Deal. [viii] Nevertheless, the administration of President Trump has taken the position that despite Iran’s compliance with the Nuclear Deal, he will not certify Iran’s compliance to Congress because the sanctions relief is enabling what the U.S. has determined to be Iran’s support of global terrorism, which runs counter to the national security interests of the U.S. within the meaning of the Nuclear Review Act. [ix]

Immediate Impact of Decertification

Just as Congress is not bound by the Nuclear Deal, the non-U.S. signatories to the Nuclear Deal are not bound by the Nuclear Review Act. Thus, President Trump’s refusal to certify under the Nuclear Review Act cannot and does not nullify the Nuclear Deal. [x] Furthermore, even under the Nuclear Review Act, Congress must still decide within 60 days whether it will propose expedited legislation to restore any of the U.S. sanctions against Iran that were suspended or otherwise relieved under the Nuclear Deal. [xi]

For most U.S. persons, President Trump’s certification or non-certification of the Nuclear Deal may not be of great direct legal significance due to the continued existence of primary sanctions and the various non-nuclear sanctions OFAC administers, which prohibit them from transacting with Iranian entities. [xii] For non-U.S. persons, the immediate impact of President Trump’s non-certification or a subsequent act of U.S. Congress reinstating sanctions is less straightforward. On the one hand, since the Nuclear Deal will remain in force, the commitments of all parties will ostensibly remain unchanged. This means that Iran remains free from the multilateral sanctions in which Europe and other parts of the world previously participated. [xiii] On the other hand, while it is true that the legal landscape cannot change overnight, the non-certification of the Nuclear Deal in spite of Iran’s acknowledged compliance with its obligations thereunder further complicates global compliance issues that the legal community had not even fully resolved while the U.S. was championing the Nuclear Deal. [xiv] After all, an agreement (even one falling short of a treaty) under which a party’s duty to perform is not linked to the terms of the deal itself is typically described as “illusory.”

Long Term and Practical Impact of Decertification

Although non-U.S. countries will still have commitments under the Nuclear Deal and U.S. law is not binding upon them, U.S. secondary sanctions would become a very powerful deterrent if reinstated by Congress. Any non-U.S. person deemed to be doing business with Iran could once again find themselves subject to ruinous fines or completely cut off from the U.S. financial system. [xv] Even after the implementation of the Nuclear Deal, which lifted the secondary sanctions, the international community was so wary of the U.S. Office of Foreign Assets Control (“OFAC”) that Iran considered it a good faith duty of the U.S. under the Nuclear Deal to give assurances to the rest of the world that it would not punish them for doing business with Iran. [xvi] If the mere memory of secondary sanctions was enough to give pause to non-U.S. entities (particularly financial institutions), it stands to reason that the prospect of a unilateral withdrawal of the U.S. from the Nuclear Deal is likely to greatly increase the risks of doing business with Iran. In its statements relating to decertification under the Nuclear Review Act, the Trump administration has indicated that it will advise Congress to articulate which “trigger points” would prompt the U.S. to reinstate sanctions against Iran. [xvii] While it is not possible to predict precisely which additional circumstances Congress might select within the allotted 60-day period, the identification of additional justifications for reinstating sanctions on Iran necessarily increases the probability that sanctions will, in fact, be reinstated. Importantly, President Trump has said that “[i]n the event [the United States] is not able to reach a solution working with Congress and our allies, then the [Nuclear Deal] will be terminated.” [xviii] President Trump’s statement strongly implies that if Congress does not introduce additional paths to reinstating sanctions on Iran, he will seek to officially withdraw the U.S. from the Nuclear Deal itself.

At the same time, it would be a mistake to think that the legal landscape will be driven purely by U.S. laws and policies. Since the issue of Iran’s compliance with the Nuclear Deal is not in dispute, Iran could easily interpret the U.S. decertification (to say nothing of the actual reinstatement of nuclear sanctions) as a breach of performance by the P5+1 and invoke the Nuclear Deal’s dispute arbitration clauses. [xix] Unlike the provisions of the Nuclear Review Act, if the Nuclear Deal’s arbitration proceedings are completed without a favorable resolution, it would nullify the Nuclear Deal. In fact, the final words of the Nuclear Deal expressly state Iran’s position on this precise scenario by closing with the observation that:

Iran has stated that if sanctions are reinstated in whole or in part, Iran will treat that as grounds to cease performing its commitments under this [Nuclear Deal] in whole or in part. [xx]

This policy statement does not appear to distinguish between unilateral and multilateral reinstatement of sanctions. Thus, the assurances of U.S. allies that they would not join the U.S. to recreate a coordinated sanctions program against Iran may be insufficient incentive to ensure Iran’s continued performance under the Nuclear Deal. [xxi] While the U.S.’s renegotiation of, as opposed to unilateral withdrawal from, the Nuclear Deal is a possibility, neither European nor Iranian government officials have expressed enthusiasm for exposing the intensely negotiated Nuclear Deal to further adjustment, even in the face of U.S. pressure. In fact, various officials from European countries have specifically discouraged the idea. [xxii] Similarly, Iranian President Hassan Rouhani left little room for doubt about Iran’s unwillingness to renegotiate the Nuclear Deal when he directly responded to President Trump before the U.N. General Assembly, saying “[t]hey were told clearly and definitively (by us) that that the nuclear deal cannot be renegotiated” and that Iran views U.S. accusations of Iran’s noncompliance with the Nuclear Deal as “ . . . baseless and unfounded . . . .” [xxiii]

Recommendations

In light of the uncertainties surrounding the Nuclear Deal, those engaged in or considering transacting with Iran should carefully consider (at least hypothetically) how to account for the increasing risk of the reinstatement of U.S. sanctions or the collapse of the Nuclear Deal itself. OFAC has stated its interpretation that “[t]he [Nuclear Deal] does not grandfather contracts signed prior to snapback [of sanctions].” [xxiv] While OFAC will not retroactively punish legitimate activity that was undertaken in reliance on the Nuclear Deal’s sanctions relief, OFAC is not inclined to allow continued performance of a contract if sanctions are reinstated. We recommend that non-U.S. persons, especially financial institutions, review OFAC’s guidance and discuss with legal counsel how they will approach compliance issues relating to Iranian sanctions if U.S. secondary sanctions are reinstated or the Nuclear Deal is nullified. [xxv] Even if the Nuclear Deal survives in the short term, the risks involved in transacting (directly or indirectly) with Iranian entities will be virtually impossible to determine until Congress decides which additional circumstances will prompt the U.S. to reinstate sanctions. It would be prudent to carefully negotiate the terms of any future contracts involving Iran to account for the increased uncertainties surrounding sanctions relief. Finally, any future reinstatement of sanctions is likely to involve the naming of numerous entities as “Specially Designated Nationals (SDNs)” by OFAC. As always, all persons, regardless of jurisdiction, should ensure their compliance programs examine OFAC’s online SDN list to ensure that they are not transacting with any SDN. There can be no legitimate transactions with SDNs under U.S. law without a specific license. [xxvi]

[v] “[The President] shall have Power, by and with the Advice and Consent of the Senate, to make Treaties, provided two thirds of the Senators present concur . . . .” U.S. Const. art. II, § 2, cl. 2. While there is an argument that the Nuclear Deal represents an “executive agreement” undertaken by a President Obama within the scope of his powers as Commander-in-Chief (making it at least politically, if not legally binding), such an argument presents much less certainty and is beyond the scope of this client advisory.

[vi] 42 U.S.C. § 2160e. The Nuclear Review Act was passed by such a margin that then President Obama could not have exercised his veto power. The legal question of whether the Nuclear Review Act is constitutionally permissible vis-à-vis the Senate’s treaty power has not been ruled upon by any court.

[viii] See,e.g. , “Trump Pushes to Revisit Iran Nuclear Deal, and Asks Allies to Help”, Peter Baker & Rick Gladstone, New York Times (September 20, 2017) (quoting Secretary of State Rex Tillerson as affirming the findings of the IAEA and U.S. allies that Iran “is in technical compliance with the agreement, and no one around the table took exception to that.”) (available at: https://www.nytimes.com/2017/09/20/world/middleeast/trump-iran-nuclear-deal.html ).

[x] The Nuclear Deal has its own provisions for dispute arbitration and nullification, which involve each of the signatories, their foreign ministers and the U.N. Security Council. This process, perhaps by design, is rather complicated and beyond the scope of this client advisory. It is enough to say that the Nuclear Deal does not grant the United States the ability to unilaterally nullify the agreement. The conditions for nullification are found in the Nuclear Deal’s paragraphs 36 & 37 (available at: https://www.state.gov/documents/organization/245317.pdf ).

[xii] Carter Ledyard has made note of the inability of U.S. persons to directly take advantage of sanctions relief under the Nuclear Deal in its previous client advisory on the subject. “Iranian Sanction Relief Takes a Step Forward: OFAC Clarifies Use of U.S. Dollars in Iranian Transactions”, Matthew B. James, Esq. (October 18, 2016) (noting that “U.S. persons are still broadly prohibited from doing business with Iran” in spite of implementation of the Nuclear Deal) (available at: http://www.clm.com/docs/7866513_1.pdf ).